types of business organisation

Types of Business Organisation

GCSE Business StudiesGCSE Business Studiestutor2ututor2u™™ Revision Presentations 2004Revision Presentations 2004

tutor2ututor2u™™ GCSE Business StudiesGCSE Business Studies

Introduction

A business is always owned by someone. This can just be one person, or thousands. So a business can have a number of different types of ownership depending on the aims and objectives of the owners.

Most businesses aim to make profit for their owners. Profits may not be the major objective, but in order to survive a business will need make a profit in the long term.

Some organisations however will be ‘not-for-profit’, such as charities or government-run corporations.


Key Learning Points

What are the different types of business organisation?

What are the advantages and disadvantages of each type?

What are the implications of the choice of business organisation on key issues such as:

Ability to raise finance

Control of the business

Business aims and objectives


Main types of business organisation

Sole trader

Partnership

Private Limited Company (“Ltd”)

Public Limited Company (“plc”)

Co-operatives

Franchises

Public sector


Measuring size of a business

No one measure of the size of the business

OptionsNumber of employees

Number of outlets (e.g. shops)

Total revenues (or “sales” per year)

Profit

Capital employed – amount invested in business

Market value

Often need to consider several measures together

Business size is “relative” – e.g. how large is a business compared with its main competitors?


Sole Traders

A sole trader is a business that is owned by one person

It may have one or more employees

The most common form of ownership in the UK

Often succeed – why?Can offer specialist services to customers

Can be sensitive to the needs of customers – since they are closer to the customer and react more quickly

Can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust

Key legal pointsKeep proper business accounts and records for the Inland Revenue (who collect the tax on profits) and if necessary VAT accounts

Comply with legal requirements that concern protection of the customer (e.g. Sale of Goods Act)


Operating as a sole trader

ADVANTAGESTotal control of business by owner

Cheap to start up

Keep all profit

DISADVANTAGESUnlimited liability

Difficult to raise finance

May be difficult to specialise or enjoy economies of scale

Problem with continuity if sole trader retires or dies


Unlimited liability

An important concept – it adds to the risks faced by the sole trader

Business owner responsible for all debts of business

May have to sell own possessions to pay creditors


Sole trader forming a partnership

Spreads risk across more people

Partner may bring money and resources to businessE.g. better premises to work from

Partner may bring other skills and ideas to business

Increased credibility with potential customers and suppliers –who may see dealing with business as less risky


Partnership

Business where there are two or more owners of the enterprise

Most partnerships have between two and twenty members though there are examples like the major accountancy firms where there are hundreds of partners

A partner is normally set up using a Deed of Partnership. This contains:

Amount of capital each partner should provide

How profits or losses should be divided

How many votes each partner has (usually based on proportion of capital provided)

Rules on how take on new partners

How the partnership is brought to an end, or how a partner leaves


Advantages of Partnership

Spreads the risk across more people, so if the business gets into difficulty then the are more people to share the burden of debt

Partner may bring money and resources to the business

Partner may bring other skills and ideas to the business, complementing the work already done by the original partner

Increased credibility with potential customers and suppliers –who may see dealing with the business as less risky than trading with just a sole trader


Disadvantages of a partnership

Have to share profits

Less control of business for individual

Disputes over workload

Problems if partners disagree over of direction of business


Limited company

Business owned by shareholders

Run by directors (who may also be shareholders

Liability is limited (important)


Setting up a limited company

Company has to register with Companies House

Issued with a Certificate of Incorporation

Memorandum of Association - describes what company has been formed to do

Articles of Association - internal rules covering:What directors can do

Voting rights of shareholders


Controls of a company

Shareholders own company

Company employs directors to control management of business

The directors may also be shareholders (most are)

Directors are responsible to shareholdersHave a duty to act in best interests of shareholders

Have to account for their decisions and performance (Accounts)


Importance of limited liability

Limited liability means that investors can only lose money they have invested

Encourages people to finance company

Those who have a claim against company:Limited liability means that they can only recover money from existing assets of business

They cannot claim personal assets of shareholders to recover amounts owed by company


Separate ownership and management of a company

Shareholders may have money

May not time or management skills to run company

Day to day running of business is entrusted to directors

Directors employed for their skills & experience


Differences between a private and public limited company

Shares in a plc can be traded on Stock Exchange and can be bought by members of general public

Shares in a private limited company are not available to general public

Issued share capital (initial value of shares put on sale) must be greater than £50,000 in a plc

A private limited company may have a smaller (or larger) capital.


Reasons for a private limited company to become a “plc”

Shares in a private company cannot be offered for sale to general public

Restricts availability of finance, especially if business wants to expand

It is also easier to raise money through other sources of finance e.g. from banks.

Note: becoming a “plc” does not necessarily mean that company is quoted on Stock Exchange

To do that, company must do a “flotation”


Disadvantages of being a plc

Costly and complicated to set up as a plc

Certain financial information must be made available for everyone, competitors and customers included

Shareholders in public companies expect a steady stream of income from dividends

Increased threat of takeover


Flotation

When shares in a “plc” are first offered for sale to general public

Company is given a “listing” on Stock Exchange

Opportunity for company to raise substantial funds

Complex and expensive process


Buying shares in a company

Shares normally pay dividends (share of profits)

Companies on Stock Exchange usually pay dividends twice each year

Over time value of share may increase and so can be sold for a profit (known as a “capital gain”)

Of course, price of shares can go down as well as up, so investing in shares is risky.

If they have enough shares they can influence management of company

Good example is a “venture capitalist”Will often buy up to 80% of shares of a company and insist on choosing some of directors


Risks faced by company shareholders

Company reduces its dividend or pays no dividend

Value of share falls below price shareholder paid

Company fails and investor loses money invested


Main forms of co-operative

Three main types of co-operativeRetail co-ops

Marketing or trader co-ops

Workers co-ops

Examples:Co-operative Retail Society

Farmer’s co-operatives marketing and distributing food products

Small business credit unions

Artists’ co-operatives sharing studio and exhibition facilities


Examples of franchises in the UK

McDonalds

Clarks Shoes

Pizza Hut

Holiday Inn


Franchises

The franchisor is the business whose sells the right to another business (franchisee) to operate a franchise

Franchisor may run a number of their own businesses, but also may want to let others run the business in other parts of the country

A franchise is bought by the franchiseeFranchisee required to invest – often around £10,000 - £50,000 in acquiring the franchise licence and setting up the business

Once they have purchased the franchise they have to pay a proportion of their profits to the franchisor on a regular basis

Depending on the business involved, the franchiser may provide training, management expertise and national marketing campaigns

May also supply the raw materials and equipment.


Advantages and disadvantages of franchising

AdvantagesTried and tested market place, so should have a customer base

Easier to raise money from bank to buy a franchise

Given right and appropriate equipment to do job well

Normally receive training

National advertising paid for by franchisor

Tried and tested business model

DisadvantagesCost to buy franchise

Have to pay a percentage of your revenue to business you have bought franchisor

Have to follow franchise model, so less flexible


Reasons why franchising has become more popular

Large companies have seen it as a means of rapid expansion

Franchisee provides most of finance – reduces investment in expansion

Local entrepreneur with inherited or redundancy money sees opportunity to set up business with reduced risk

Banks like combination of large company and small local business as a reduced lending risk.


Reasons for public sector organisations

Provide essential services not fully provided by private sector

Prevent exploitation of customers

Avoid duplication of resources

Protect jobs and maintain key industries


Reasons for privatisation of public organisations in UK

State run firms perceived to be inefficient

No incentive to cut costs or provide high quality services because there is no competition

State-run firms can be a financial burden on government

Selling them off raises valuable money for government


Disadvantages of privatisation

Private companies may put prices up

Cut jobs and reduce services that are not profitable

Disadvantages the needy

types of business organisation

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